A ski resort has always relied on natural snow, which could come in any one of four levels: heavy,
medium, light, or none, with probabilities 0.1, 0.4, 0.3, and 0.2 respectively. They are now, in July,
considering the installation of an artificial snow-making system before the upcoming season. If installed,
the annual amortized cost would be $40,000. The operating costs of the snow system would
be $0 if the natural snow were heavy, $50,000 if medium, $80,000 if light, and $110,000 if there were
no natural snow. With an artificial snow system, or with heavy natural snow, they would obtain revenue
of $200,000. With no artificial snow, the revenue would be only $130,000 with medium snow,
$70,000 with little snow, and $0 if there were no snow. Operating costs other than snow-making
would be $45,000 per year (whether artificial or natural snow).
Choosing, before the season begins, to close the operation completely for the upcoming season,
would allow them to rent the land with a rental income of $20,000.
a ) What option should they take?
b ) Determine the EVPI by first finding the EV with PI.
(c) Suppose that the $40,000 annualized cost of installation could be lower or higher. What are the
limits for this value that would cause the recommendation to remain unchanged?
Here's what I got...just wondering if I did it right
a) It is reccomended that the company install artificial snowmaking with an expected profit of $94,000. Numbers below are in thousands
Got it by:
With snowmaking - (0.1(200) + 0.4(200-50) + 0.3(200-80) + 0.2 (200-110)) - 40 = 94
Close operation - 20
Without snowmaking - 0.1(200) + 0.4(130) + 0.3(70) = 93
b) EV with PI = 200(0.1)+20+130(0.4) = 132
EVPI = EV with PI - EV w/o PI
= 132-94 = 38
And I don't know how to do C.